Will the latter half of 2011 be known as the time when American demand for new cars exceeded available supply by the greatest number of vehicles since World War II?

Let's take a look at just a few of the conditions that have brought the auto industry to a point where we have the potential for new vehicle purchase demand to dramatically exceed the retail network's ability to deliver the new cars and trucks that people would like to purchase...

1. Vehicle Scrappage volume in units, plus the volume of vehicle exported from the USA average between 10 and 12 million units each year. This total number of vehicles removed from American roads has exceeded new vehicle sales for the past 3 years (2008, 2009 and 2010). As a friend of mine who exports cars for a very healthy living told me while I was at NADA in San Francisco; "Americans are not going to start walking to work just because the Russians are buying up all the used cars and putting them on boats toVladivostok..."

What? You didn't know? Have you bought any "deals" on used cars at the auctions lately? I thought not... You can thank Igor the Russian used car buyer for sky high auction prices.

2. OFFICIAL FEDERAL GOVT DATA: The average EPA fuel economy rating of all 2011 new vehicle models is OVER 34 MPG, while the average EPA fuel economy rating for all vehicles being driven by Americans is between 18 MPG and 22 MPG (higher than I would have guessed).

That is a gap of 70% between the fuel economy of what people are driving today versus the fuel economy of new 2011 and 2012 vehicles available for purchase.

It goes without saying that in the devastating earthquake and follow-up tsunami that hit Japan last Friday, the largest cost will be a human one. Thousands of people have been killed, and the death toll is going to continue to rise in the coming days and weeks as cleanup and recovery operations progress.

There’s also an economic cost to the disaster. Early estimates are that reconstruction costs might exceed $35 billion USD, to say nothing of the diversion of resources away from attempting to grow Japan’s economy and overcome a 20-year period of stagnant economic growth and immense public debt. The auto industry in Japan is not immune from these forces, and in fact has already been significantly impacted by the disaster, with more to come.

Japan’s seven largest automakers – Toyota, Nissan, Honda, Suzuki, Mazda, Mitsubishi, and Fuji Heavy Industries (Subaru) have all suspended vehicle production. Though only Toyota actually has a major manufacturing presence in the quake zone, parts suppliers for nearly all automakers have at least some facilities in the affected areas. If a single part for a car is not on hand at production time, the car can’t be built (with limited exceptions). You can’t assemble a car without brakes, or suspension arms, or even a radio.

The supply chain is in bad shape. Days after the disaster hit, apparently automakers are still unable to make any contact with some of their quake-zone suppliers. Automotive News reported that Honda has 113 suppliers in the quake zone and still can’t make contact with 44 of them, three days after Friday’s earthquake.

For now, most automakers are suspending production through Wednesday, with plans to reassess at that point. Not only are there supply-chain issues, but they also need to give their workers time to deal with family issues and to reconnect with loved ones.

The auto-industry impact of the quake will not be limited to Japan, either. There were some 2,300 Nissan and Infiniti vehicles ready for shipment sitting alongside the port when the tsunami hit, and those cars are now ruined. US-bound Honda Fits are affected by the Honda shutdown, as are US-bound Acura RLs (we may be OK on the latter point). Even transplant production in the US, where Japanese automakers build cars in here, could be impacted if a particular part is sourced from Japan, or specifically in the earthquake zone.

It is likely to be quite a while before Japanese production returns to normal levels. Toyota, for example, was already forecasting a 4% production drop for 2011, but losing over 13,000 units of Toyota production per day will reduce actual 2011 output even further. With several of Japan’s nuclear power plants offline or reducing their output, there also may not be enough energy to power energy-intensive automobile manufacturing plants.

The string of deadly tornadoes and storms that attacked the south, leaving at least 291 people dead, have also impacted Toyota and Mercedes-Benz, who halted production at their plants in the affected areas.

“On Wednesday, a mile-wide tornado destroyed parts of Tuscaloosa, Ala., damaging the Mercedes-Benz U.S. International auto-assembly plant just north of the city. That plant builds the GL, M, and R class vehicles,” writes Automotive News. “The same storm cell of multiple tornadoes wreaked havoc along a 300-mile stretch, taking out power to an unknown number of auto parts manufacturers and other businesses as far north as Virginia.”

On Wednesday, Tuscaloosa News, a publication based in Alabama, reported, “The early-morning storm caused damage at the Mercedes-Benz plant in Vance. Company spokeswoman Felyicia Jerald said a roof was damaged at one of the plant's auxiliary buildings, trees fell on employees' personal vehicles and the plant's employees' fitness center sustained heavy damage and has been closed.”

According to the New York Times, the plant will be closed for the remainder of the week and will reopen Monday. The publication adds, “Honda’s plant in Lincoln, Ala., did not sustain damage, according to the Automotive News report, but a Toyota plant in Huntsville, which builds V-6 and V-8 engines for Tundra and Tacoma pickup trucks, had lost power and was closed.”

Like Honda, Hyundai’s factory did not sustain damage. “Hyundai Motor Co, which also has a plant in Alabama, said that its factory was outside of the range of the major storms and was not affected,” says Reuters.

Plant shut downs may remind you of the impact the tsunami and earthquake in Japan has had on the international automotive industry. The earthquake has had greater consequences, and while plants have closed for a few days in the United States, automakers have not shown concern for any long term impacts on production and parts deliveries.

SUMMARY - The American Auto Industry now has the most fuel efficient vehicles in the history of the auto industry to offer new car buyers... Gasoline will most likely never drop below $3.50 a gallon (at least during my lifetime), and will most likely top $5 per gallon any day now. The quantity of American cars, Units In Operation (UIO) that have been exported and/or scrapped during the past 3 years EXCEEDS the quantity of new vehicles sold in the USA during the same time period..

Hmmm... I am tempted to talk about a "Perfect Storm" in demand creation and supply disruption, except given the production of new Toyota's, Hyundai's, Mercedes-Benz and Kia's that the tornadoes and storms have caused this past, any commentary using the phrase "Perfect Storm" could be viewed as being in bad taste.

Well... What do YOU think? Will the Auto Industry in America soon be facing a situation where more people want to buy new cars than there are enough new cars available to sell them?

Replies to This ADM Discussion

This will obviously be a trying time for the Japanese car makers facing supply shortages but let me be the first to encourage these dealers to stop and think for a minute before they do something very stupid and damaging to their brands. I recently received two blast emails from an Acura dealer and an Infiniti dealer. Both emails touted that due to the disaster in Japan, "Now was the time to buy before supplies dry up and the incentives go away." This goes beyond just bad taste and borders on corporate malfeasance. My first thought when I got these emails was that someone screwed up and let an intern send out an email blast in the Acura store. Then, five minutes later, I got the same email from the Infiniti store. Both stores are part of a large dealer group that I will not name but clearly, this was a group wide strategy. Please folks, take a breath and consider the tragedy that took place. Over 18,000 people died and the economic devastation will be felt for years to come. Before we try to pitch this as "a great time to buy," let's have some respect for ourselves and those who died.

Mike - Thank you for putting the proper perspective on the impact of these natural disasters... There is no doubt that the email blast you referred to will do some level of damage to those dealership's reputations.

However, I do want to point out that if the horrible disasters in Japan and the Southern USA had not happened at all, the numbers would have still pointed to a looming situation where consumer demand for new vehicles would have exceeded the industry's available supply, and perhaps even the production capacity to supply.

At the present moment, the key word here is "soon". Although the Supply/Demand Gap is large, the simple facts with greater relativity are: 1) American consumers mostly are still feeling the pressure of a "stag-flated" economy, and are thereby buying older cars and keeping them longer 2) Auto Retail is still recovering from era defining lows in New Car Sales numbers and the return to steady is likely to remain gradual as aspects of our collective economy which affect our industry such as cashflow for businesses, credit availability for consumers, and both cash and credit availability challenges to traditional dealer operators are dealt with and managed into a robust sector-wide improvement 3) America has another important paradigm shift coming "soon" - the changing face of the American consumer (the "Boomers" utilized a different set of shopping and spending habits and tools than the forthcoming generation will), and this will cause even more adjustments.

So true Dee when you say "American consumers mostly are still feeling the pressure of a "stag-flated" economy......." Stagflation, AKA the Misery Index in the mid 70's was the addition of the inflation rate to the unemployment rate.

Today's story tellers leave out all the bad news, and we have nothing but good news. Kind of like when the government bean-counters exclude food and energy from their core inflation calculations.

Using the same metrics for calculations to those used in the 70's and 80's, we would discover we are in a much bigger slump than the story tellers of today would have us believe.

The cost of a new home and a 42" plasma may have gone down, but energy and food have put extreme pressure on the consumer.

Supply/Demand Gaps current spike caused in part by the events noted in the original post will likely ease when things begin to settle and we look beyond the talk.Walmart announced this week that their "typical" customer is running out of money.

I think you are spot on when you suggest that the boomers will bring yet another shift. This boomer (me) is now drawing on the more conservative values of his earlier life....Less is more.

I share your vision Dee when you mention Auto Retail Past and Auto Retail Future and the "force feeding" of our old school tactics through new platforms. It is not a good fit and unfortunately the consumer still expects this behavior from us as we make weak attempts to separate ourselves from our past. Only through industry-wide dramatic change and transparent marketing will we earn credibility with the online consumer. Two great replies Dee, thanks for sharing your clear visions.

Thomas - Thanks for the wise observations... You and i are both old enough to remember when selling cars during 21.8% APR Prime Rate was a challenge and the impact of inflation on eating away people's buying power. Many young people today have never experienced an economy marred by double digit inflation, but they can easily imagine it if they look at what has happened to gas prices during the past year and apply that impact to if EVERYTHING went up in cost just like gasoline has... Not a pretty picture, yet our current economy is aligning itself for maximum inflation caused by the deflation of the US Dollar and rising commodity prices. I sincerely hope I am wrong about this, but still remember my graduate school economics classes in the early 80's when I learned that simply increasing the money supply (what the Fed is doing today) inevitably increases the rate of inflation.

Also, Mike Warwick, your wise advice is well taken, champion. Your observation of how these campaigns are being set up offers quite a good example of what I call "Auto Retail Present". At the present moment, our industry has Auto Retail Past trying to force feed traditional conversation and rhetoric across contemporary platforms of socialization - (i.e. Internet, Online Buying Servces, and Social Media). As evidenced by the plummetted margins on the variable side, Auto Retail Past had a dysfunctional conversation with the consumer that centered around gimmicks like the campaigns you point out. The objective of Auto Retail Future, Mike, is to identify the accurate value proposition a consumer (absolutey, one individual, specific, and unique consumer at a time) is seeking, and provide a means for the transaction to evolve and revolve around it. Auto Retail Present is the wrestling match necessary for this growth to occur.

Ralph, you brought me back to my base with all this information. You brought me back to Trade Cycle Technology.

Would it now be prudent to put as many of our customers into short term trade cycles so we can:

1. Know when they are back in the market in advance

2. Keep the off lease vehicle and sell it as a "New To You" or as OEM's like to say a CPO.

3. Put the customer back into a new vehicle even if we order it two months before he or she terms.

It seems that what we did at Half-A-Car is more important than ever and now we can do it for the right reason. It is good common business sense for the long term not just a way to rip the customer's head off on today's deal.

While this stands as very relevant industry experience and insight, Frank, the economy in 1977 different and the consumer was spending under a different set of circumstances as a result. Although the period we are in is promising for as impressive a recovery, I would expect the market to return more slowly. Economic factors including 1) consumer credit down overall and more expansively than ever in recent history 2) dealer floor plan financing portfolio's harder to justify against variable sales margins 3) and the prospect that the dynamic of consumer audiences are slated to change drastically as the 'Boomers' migrate out.

After meeting this past week with "auto-industry retired" Lexus finance veteran Cedric Rashad who accomplished a great deal using the short-term turn method and became rich from returns that leveraging Lease Payment structures brought in an even more recent era, throughout the 90's.

In fact, advising the avant garde among Auto Retail Present, I still use his expertise in this area:

Also, in speaking with Atlanta Regional Manager for JM&A, John Ward, we agree that contemporary brick and mortar dealership operations are highly leveraging fixed operations along with profits from F&I or 'back-end' sales in variable.

To this point, for the automotive retail segment the time seems right for the massive re-introduction of short-term lease programs again, but the economy may need an additional year to 18-month period of recovery yet before the time to leverage such an opportunity is ripe for harvest.

I have been getting the same insight regarding the resurgence of 24 to 36 month leasing from different sources and for different reasons... Your comment reinforces this emerging factor all that much more.

Frank - You are 100% in alignment with what I have been thinking for quite awhile, as well as many other people. The biggest challenge we are facing is the lack of expertise within sales departments on how to properly present short-term residual based financing as a better choice than conventional long term fully amortized financing. If there were ever a time when the old Half-A-Car TCT program could best serve everyone in the industry, now is it.

I think both of you are certainly 100% correct. The trick now would be to get the financial institutions to jump back in the game as Ford did in the 90's. We all know that where part of the HAC team that is needs to be done with rate and incentive money up front and not play the "dice game" of residule value. Mabey it is time to get the gang back together!

As a follow up to this post; I received a phone call at 6:15 AM today from a manager at one of the Japanese car companies in regards to this article. We discussed several strategies for dealers and one of his suggestions makes so much sense I wanted to share it with the ADM Community...

Each dealer is facing different availability opportunities within their regions/zones. For example, you may be a Toyota dealer who sees current availability of Tundra, Camry or Sienna in your Region's allocation reports. The goal would be to use the available vehicles to attract trade-ins of late model Toyotas so you have the ability to generate TCUV inventory, turning each New Toyota sales into two or three unit sales, 1 new and 1 or 2 more Certified Used Vehicles.

This strategy could be applied to any brand that is experiencing shortages... Use what is availlable to drive Certified Used Vehicle inventory acquisition.

Welcome toAutomotive Digital Marketing ProCom
Please use the "Sign Up" link above to complete your registration form and become a member of the industry's leading Automotive Marketing and Internet Sales Professional Community. ADM members have access to resources, connections and private events that provide them with a competitive advantage.